Retailers: Five Key Techniques to Segment Customers

January 20, 2014

By Rosie Poultney, 89 Degrees

As businesses try to figure out how to best use all the extra information flooding in from the omni-channel world, segmentation is a hotter topic than ever. Looking back at our conversations with clients in 2013 on the best segmentation approaches to help build their businesses, some key themes stand out. Here are those five key points, each of which will continue to be important in 2014 and for many years to come:

1. One is Never Enough
Most businesses are complex enough to need more than one segmentation to describe their customer base. At minimum, they need to be thinking about these aspects:

a. RFM (recency, frequency, monetary value). It’s the old workhorse of segmentations and may be slightly out of fashion, but there’s nothing better to measure business health, keep track of retention and attrition and guide investment decisions to keep customers profitable. Avoid deciles and concentrate on actual behavior that is easy to explain.

b. Behavioral or Needs-Based or Motivational. Their descriptions boil down to the same thing – understand why customers use your business. Typically these segments include phrases like ‘convenience,’ ‘expert’ or ‘creature of habit.’ These are often related to RFM, but you can find the behavioral segments across all tiers of an RFM.

c. Pricing or promotion. The landscape has changed irrevocably. Technology has made it easier to find a deal and the 2008 economic downturn made it socially acceptable to hunt for one. This doesn’t mean we are all coupon-clippers, but understanding price and promotional sensitivity will lead to better investments.

d. Responsiveness to marketing activity. The ‘two-way street’ analogy of customers’ engagement with a brand was huge in 2013. As customers increase their touch points with an organization, their loyalty and long term value also increases. Responsiveness across different channels is a key component of engagement and is immediately actionable – build channel responsiveness first, then expand to understand wider brand engagement.

2. Behavior Between Purchases Can Inform As Much As The Transactions
If you have products with longer purchase cycles, a relatively high purchase price, or one where customers research their decisions, then you need to take a more pro-active approach to customer engagement. There is a definite trend to set up methods to understand and interact with customers during the decision-making process. This can be as simple as using your clickstream and e-mail response behavior to describe engagement, or as complex as creating sites or programs with explicit points-earning activities outside of transactions to keep customers involved.

3. Keep it Simple, and Use the Building Blocks
Avoid having too many categories in any segmentation; four to six usually work best. If you find you need more, then provide guidance on how to roll up. Otherwise, users will simplify and you won’t always like how they do it!

Segmentations often contain analytics that are never seen again. How often have you sat through a presentation about factoring and clustering to get to an answer? Consider using those building blocks for specific targeting. Perhaps one of the differentiators within your customer base is a willingness to tackle a difficult job, or a tendency to buy seasonal gifts. If you’ve built indicators as part of the segmentation process, then it’s okay to use these for specific campaigns – it doesn’t have to all be about the final segments.

4. Two Big Dos and Don’ts
Tiered benefits can be a really effective mechanism for understanding and motivating customers, but don’t monkey with them – a spike in ‘gold’ customers should be because they are spending more, not because of a double points promotion.

It’s also important not to ignore the cadence within your own organization. If you have a seasonal business, use complete years of transactions, otherwise you can introduce spikes and troughs that are simply data artifacts.

5. Build Momentum by Building Consensus
a. Have some early wins planned. Show how personalized communications, insight for merchants, or showing how a big company issue – like churn – would be solved differently for each segment. Examples and case studies can be strong evidence in the court of approvals.

b. Split your research or costs by segment type; don’t design benefits on what your average customer wants if the average is diluted by low-spending individuals.

c. Get IT involved early. Operational constraints influence what can be delivered and actioned. Design for the future, but be aware of the current situation.

The final piece of the puzzle is to consider how an effective segmentation will change your organization; it’s a question that often gets missed in the quest to build the best. For most segmentations, the truth is that a big part of success is the roll-out. Have a plan for who you’ll need to influence to get it accepted and include them along the way. Spend time to evolve existing processes and make it easy to adopt. Smart, well-executed segmentations can guide today’s torrent of information into a targeted and predictable source for your business’ profit stream in 2014 and beyond.

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